Fertilizer Bulls Are Ignoring Planting Cycles

Over the last several weeks, I have read countless analyst reports, news articles and blog entries that have all tried to make the case that the earnings of the fertilizer companies are all set to soar. The investment thesis proposed by these authors revolves around surging world demand and the recent flooding in the Midwest. While the flooding has been tragic, fertilizer bulls have argued that the flooding will act as a catalyst for companies such as Monsanto (MON) and Potash Corp. (POT).

These traders are speculating that farmers will choose to replant their crops in an effort to cash in on surging commodity prices, and that to achieve these results they will be forced to relay on tremendous amounts of fertilizer to ensure adequate crop yields. Given the current supply and demand imbalance in the food markets I have no doubt that the long-term thesis for fertilizer stocks is correct; however, in the short term I believe that the fertilizer bulls are mistaken, as they are ignoring the basic planting cycles for corn and soybeans. It is my opinion that it is simply too late for farmers to replant in an economic manner.

According to the Iowa State extension office the optimum time to plant corn is between April 20 and May 10. The longer that one delays planting, or takes to replant, the dramatically lower the crop yield will be. While Fertilizers may help support late plantings, there comes a point where the cost-benefit equation is decidedly against farmers. I believe we are very close to that point. After all, we must remember that farmers are some of the most subsidized Americans and the most recent farm bill is but another example of the strong support that farmers have on Capital Hill. Even if they do not replant, they are guaranteed a significant amount of replacement income, which for some is tied to the prices of the crops they would have produced. Since this is the case, I see no reason for farmers to spend additional money on fertilizer products when they can simply collect from the government at the end of the year.

Below is an interesting chart on corn yields matched up against the planting date. When looking at the chart it is important to remember that it is nearly July and the ground is still wet.